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I recommended Alliance Pharma (LSE:APH) on my Premium Nifty Fifty website at a 31p offer price just before Christmas. The mid is now 32.125p following a cracking trading statement on 15th January. The bottom line comrades is that to get my best tips first you sign up for Nifty Fifty HERE and as it happens I have another sizzler in the pipeline which will go live tomorrow morning. But back to Alliance. It is still cheap at 32.125p – my target price is 60p and here is why.
Investment Case: AIM-listed speciality pharmaceutical company, Alliance Pharma did not enjoy the greatest of years in 2012 – with its performance particularly impacted by some increased competition and production problems. Against such a backdrop, the share price has been pretty resilient – starting the year at 30.875p and now at 32.125p having fallen to 23p in July following manufacturing of a treatment the company distributed under licence in the UK and Ireland being suspended “to address certain production issues”. However, the negative noise has clouded some positive underlying developments and I believe the share price recovery has further to go. Earnings per share have increased from 0.23p in 2007 to 3.62p last year and I see the shares easily capable of injecting through their 2010 high of 38.25p, with 60p my target. I note also that my friend Nigel Wray and the investment funds of star fund manager Mark Slater ( also my friend) are significant shareholders here something they will both no doubt discuss as keynote speakers at the UKInvestor Show where Alliance Pharma itself will also be presenting. If you have not booked your ticket for April 13th yet hurry up and do so now as they are already 66% sold out. You can get more details and book HERE.
Operations: Alliance Pharma acquires and licenses, markets and distributes, mainly prescription-driven, pharmaceutical products. The company commenced trading in 1998 and has a strong track record of acquiring the rights to established niche products for a range of conditions which are out of patent and have predictable demand. The company currently owns or licenses the rights to more than 50 pharmaceutical products – most of which require little or no promotional support. However, it does actively market a small number with clear growth potential, whilst also continuing to explore opportunities to expand its range. Currently generating just under a fifth of its sales from outside the UK, Alliance is particularly looking to replicate its UK model in Western Europe and has recently appointed two new managers to develop opportunities and sales on the Continent.
Management Incentive: CEO John Dawson founded the company having gained multi-disciplinary experience in the pharmaceutical industry over more than 25 years, including various senior roles at Sandoz Pharmaceuticals (now a subsidiary of multinational Novartis). He is supported by an experienced executive team and has an interest in 60,036,402 shares in the company, representing a 24.70% stake. His remuneration in 2011 totalled £264,194, with his basic salary £196,000. The basic salaries of the three other executive directors were £143,533, with each of them having share options exercisable at 29.25p+.
Financials: September-announced results for the first half of calendar 2012 showed a pre-tax profit of £5.31 million on revenue of £22 million, generating earnings per share of 1.80p. This represented a more than 24% decline in earnings per share from the first half of 2011 (pre-tax profit: £7.0 million, revenue £24.39 million) as increased competition for Deltacortil (prednisolone) and Nu-Seals (aspirin) and production problems for ImmuCyst (bladder treatment) licensor Sanofi Pasteur – which is not expected to resume supply of this treatment until late 2013 – took a toll.
However, excluding Deltacortril, sales and pre-tax profit were still 2% and 16% respectively up on the first half of 2011 and continued growth in dermatology product Hydromol (sales increased by 28% to £2.2 million) and the benefits of acquisitions made in 2011 saw the current year first half performance represent a step up from the second half of last year (1.24p of earnings per share, pre-tax profit: £3.72 million, revenue: £21.57 million). The interim dividend was increased by 10% to 0.275p per share.
During the 2012 half year period, net bank debt was reduced by £4.08 million to end at £14.32 million, with there also being £4.35 million of convertible debt (from £4.46 million). However, Alliance has subsequently acquired anti-malarial brands Paludrine, Avloclor and Savarine from AstraZeneca UK for an initial £4.2 million and stoma care products seller Opus Group for £8 million plus its net asset value at completion (estimated at £1.5 million).
On 15th January Alliance revealed that calendar 2012 turnover is expected to be £44.9 million and that, “as a result of a stronger than expected gross margin rate, pre-tax profits are expected to be slightly ahead of current market expectations”. As such, I now expect the pre-tax profit to exceed £10 million (a little below £10 million was previously anticipated), generating earnings per share of circa. 3.5p.
Alliance also stated that it has agreed an additional £10 million acquisition facility with Lloyds Banking Group (£16.5 million of an original £20 million facility put in place in 2010 having been drawn to part-fund acquisitions over the past two years). The company added that “the acquisitions completed during 2012, Opus Group Holdings and the antimalarial brands purchased from AstraZeneca, performed in line with expectations”. So expect more bolt-ons.
Risks: The pharmaceutical industry is high-risk – particularly with most drugs under development failing to reach market and the drug development process typically requiring significant amounts of capital. Alliance’s business model is designed to avoid such R&D and regulatory risk in focusing on products which have already completed this process and are established. This, together with a diversified portfolio approach – with the company’s top five products accounting for less than half of total sales and top ten 68% of annualised sales – provides relatively strong cash flow stability, which reassures in relation to the net debt position.
There is of course still some risk in acquisition and licence selection and regulation. Alliance targets niche products as it looks to deter generic competition – though this may still emerge; the significant recent year growth of Deltacortril having resulted in this. Additionally, the current production issues with ImmuCyst and decision by Novartis to take back in-house at the end of this year a small portfolio of drugs currently licensed to Alliance reflect potential risks in the licensing model. In terms of regulation, a toughening of the UK government’s NHS Pharmaceutical Price Regulation Scheme and Irish Government generic substitution enabling legislation is set to have some adverse impact on Alliance in future years, with the company itself noting “for most of our existing portfolio, the opportunities for expanding international sales are limited: as… they would have to dislodge similarly well-entrenched competitors”. However, the newly acquired anti-malarial products give a useful foothold in France (where it is already well established with annual sales of around £1 million) and continuing consolidation and rationalisation within ‘big Pharma’ suggests a decent pipeline of established products being available at attractive prices.
Valuation: 2012 pre-tax profit should come in at more than £10 million (from £10.71 million in 2011) which means earnings of c3.5p. However, with sales of Deltacortril now appearing to have stabilised, the acquisitions which have been made and plenty of scope seen to drive organic sales growth, 2013 earnings are expected to come in ahead of 2011’s 3.62p per share and the company’s strong, stable operating cash flows have seen it emphasise that “we remain well placed to fund further acquisitions”. I reckon that even without any more bolt-ons, 2013 earnings will be 4p per share.
First half 2012 net interest costs of £0.705 million were comfortably covered by an underlying operating profit of £6.43 million, with the £4.46 million of convertible debt at the start of the period now £4.21 million and this 8% interest bearing debt expiring at the end of November next year and convertible into shares at 21p per share. Conversion represents a potential 8.25% increase in the issued share capital, though will reduce the company’s debt burden and interest costs. A 10% increase in the full-year dividend would mean a total 0.825p per share payout for the year – this equating to a 2.6% yield and a continuingly progressive dividend policy is foreseen going forward.
Significant and reliable operating cash flows in conjunction with the company’s organic and acquisitive growth potential mean I consider a low teens earnings multiple justifiable here. However, even a 12x multiple of next year’s projected earnings suggests a share price of around 48p and I reckon that as Alliance shows that it is back on the growth path once again a multiple of 15 ( given its cracking earnings visibility) is not implausible – that gives me my 60p target price. At 32.125p the shares are a buy.
Tom Winnifrith writes for 10 UK and US investment, business and political websites but his best share tip[s appear first ( along with detailed updates and analysis of any news event) on his premium Nifty Fifty website which also features a weekly Short Letter on stocks to short and CEO video interviews. For immediate access to the Nifty Fifty ahead of tomorrow’s next red hot share tip click HERE
